Who said tax is boring?

Of mice and men

It is lucky the President didn’t ask himself what Dean Martin would have done

When challenged by an aide as to why he had changed his mind about invading the tiny island nation of Grenada, Ronald Reagan is reported to have replied “I sat back and thought: What would John Wayne have done?”

That was nearly 30 years ago and the protracted 7 week campaign was a huge military success for the world’s No. 1 military power dwarfing Britain’s earlier victorious 10 week recapture of a bunch of rock formations from the Argentinians.

The way irritating little tax haven islands have been behaving lately it might be time for a refresher course in “Who’s Sheriff round these parts?”

The Cayman Islands, as most people reading this blog will know, does not have much of a history of Direct Tax. In fact, it does not have ANY history of Direct Tax. As such it is among the OECD’s ultimate nightmare nations because, whatever is done to tackle Harmful Tax Competition, it is difficult to hammer a country that says it will not tax anyone.

Foreign workers arriving in Cayman Islands

Therefore, it was something of a surprise when Caymanian premier McKeeva Bush announced last month that his government would be imposing a tax on salaries known as a community enhancement fee. Surprise turned to fury when it turned out that only foreign workers would be required to pay the tax. What made matters worse was that the tax was cynically devised to encourage employers to replace a current compulsory pension contribution with a contribution towards the tax which would enable the Cayman Islands to compete with the Bermudian employment tax system while netting more tax. The lame excuse given was that they were under pressure from the UK (Cayman Islands is a UK whatchamacallit) to balance the budget – and this avoided the need for “painful” budget cuts. To cut a short story even shorter, last week the proposal was cancelled . What amazes me is the absolute cheek of it all. Here is a nation, whose main industry is the denial of tax to others – with a population of 55,000 there are 9,000 mutual funds, 260 banks and 80,000 companies forcing other countries to either borrow or cut public spending – that thought it could tax with impunity and still only inflict the pain on foreigners.

What happened the last time the British left

However, Caymanian chutzpah pales when compared to the Channel Islands. Famous for inventing the offshore industry as well as two breeds of dairy cow, Jersey and Guernsey government representatives have been bleating rather than lowing in recent months. In an interview with the Guardian newspaper, the Assistant Chief Minister and former Bailiff of Jersey even went as far as to threaten independence from the UK (how will the UK survive?) although he was quick to stress, in good old-time conservative banking fashion, that this would be “quite a long way down the road”. Given that the islands are the last remnant of the Duchy of Normandy, the rest having been lost to the French by King John (great name, lousy monarch) 800 years ago, “quite a long way down the road” could be any time not in the next 500 years. .

Idle threats apart, what was the gripe? At the end of last year the British closed down an expensive VAT avoidance scheme that was causing extreme distortions in the distribution of goods. The EU exempts low value products from VAT on import from non-EU countries. Although the Channel Islands are UK Crown Dependencies they have their own governments and are not part of the EU. As a result British and other mail order companies were exporting their low value goods to Channel Islands subsidiaries who then sold them to UK and other customers without VAT. This gave a clear pricing advantage over local suppliers (the customers are invariably private individuals who cannot reclaim the VAT). Worse, they were also splitting much larger deliveries into small components to circumvent the VAT requirement.

More recently the Times newspaper uncovered a widespread direct tax avoidance scheme. UK resident wealthy individuals would be employed by a Jersey entity called a K2 which would charge for their services. Rather than paying them a large salary or dividend, the Jersey company would pay a small salary to be assessed to tax in the UK and give them a tax-free loan resulting in tax paid of around 1%. For some reason, British protests at this clear act of unfair play together with closing the VAT loophole got the government so riled that, despite being a camembert cheese’s throw from the Normandy Coast and the hands of any potential Continental European aggressor, they would like to consider going it alone (one day).

Guernsey was marginally less annoying when told that, while their zero-10 corporate tax system (everybody pays zero tax except financial institutions and local real estate businesses) was not considered Harmful Tax Competition, they would have to cease charging Guernsey resident shareholders tax on deemed dividends and await the real thing. This proved a minor blow for the Bailiwick’s budget balancing but the Treasury Minister accepted it; on the other hand he lamented that external forces had forced their hand. What did he really expect?

“Mr Gorbachev, pour me another drink!”

The Channel Islands have Bailiffs rather than Sheriffs. Who cares? If they sent in John Wayne he would, as always, just play himself and sort them out good and proper. After all, it was thanks to his philosophy that Grenada became the law-abiding paradise it is today and that the Soviet Union fell apart.